The latest Obama-Xi announcement sends a strong message: the two nations are acting fast to enable a global low carbon transition. Friday’s joint announcement is an unprecedented step by the world’s #1 and #2 emitters to commit, at the highest levels, to a strong set of domestic policies and to reinforce global mechanisms that will help to engage peers ahead of the upcoming landmark climate change negotiations in Paris.

Pricing Carbon

Xi has committed China to launching a national emissions trading system for CO2 in 2017. An emissions trading system will directly constrain a large share of China’s CO2 emissions and, by putting a price on emissions, encourage reductions where they cost least. This is impressive in that China is pledging to reduce emissions at a time when its per-capita income is less than one-fifth of the U.S. and its economy faces headwinds. It recognizes the long-term benefits of action now—for local air quality, global climate, and its own long-term leadership in delivering innovative solutions that all nations will eventually need. While China is not the first to establish an emissions trading system, China’s is likely to be the largest when it comes online in 2017. While the European Union has built an emissions trading system over the past two decades, the U.S. has so far not been successful in adopting a national system for greenhouse gases. In 2009 the Waxman-Markey Bill, which would have established an emissions trading system in the U.S., failed to pass Congress, leaving the U.S. to rely on a piecemeal approach that largely repurposed existing regulations, such as vehicle fuel economy standards and power plant emissions limits established under the Clean Air Act, to mandate CO2 emissions reduction. Indeed, these measures formed the cornerstone of the U.S. domestic action pledged on Friday, and they will have impact. However, an emissions trading system that could deliver the same reductions at lower aggregate cost has so far proven politically unpalatable. China’s latest move could prompt a rethink on emissions trading in the U.S.

Valerie J. Karplus is the Class of 1943 Career Development Professor and an Assistant Professor of Global Economics and Management at the MIT Sloan School of Management and Director of the Tsinghua-MIT China Energy and Climate Project (CECP) in the MIT Joint Program on the Science and Policy of Global Change.